Shamubeel Eaqub: Simplicity Chief Economist on the debate over potentially loosening capital requirements for banks

There's debate over the potential loosening of bank rules. 

Reserve Bank requirements —forcing banks to have enough capital to withstand a one-in-200-year shock— look set to be loosened. 

Banks say that could reduce the cost of borrowing. 

But Simplicity Chief Economist Shamubeel Eaqub told Andrew Dickens it won't address the underlying reasons why banks aren't lending more money. 

He says mortgage rates are currently 2% over the cost of borrowing, and banks aren't lending enough to businesses and farms. 

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Episode Transcript

Speaker 1 (00:00):
So Westpac calling for the Reserve Bank to relax capital requirements. Now,
the move would make it easier for banks to give
out loans. That's what Westpac thinks, and we'll put New
Zealand on par with countries like the UK and Australia.
And Chamom bier Lekub is the chief economist at Simplicity
and joins me now, Hella Chamaville, good morning. So the
bank reckons that reducing the capital of the bank must

(00:21):
hold would reduce the costs of a four million dollar
farm loan by twenty grand? Are they right?

Speaker 2 (00:27):
Yeah, it's a bit of right margin. So every time
the capital recommend grows up, banks to have to borrow
money more expensively, and so it kind of increases mortgage
rates by a butt zero point one percent to point
one five percent. It's not a huge amount, but it matters.

Speaker 1 (00:43):
Yes, nobody sneezes at twenty grand. So if if Westpac
got its way and there was a reduction of capital,
would that make banks more vulnerable at these uncertain times?
Because that's why it was put in the first place.

Speaker 2 (00:57):
Absolutely. I think that's really the big tread of is
do we think our banks are unsafe? I think the
other way of looking at it is our bank's not
making enough money during the good and bad times. I
think the answer is they're making great money in great
times and in bad times. We just had a terrible
recession and they're still made billions of dollars in profits.

Speaker 1 (01:18):
So would it help the economy recover faster?

Speaker 2 (01:21):
I don't think so. I don't think the bank capital
is the reason why our banks are not lending enough money.
There are two things going on. One that our mortgage
rates are far too expensive. So on average, banks are
charging over two percent over their cost of borrowing, so
their mortgage rates are really high. So, for example, the
cheapest mortgage ratey can get right now, it's five percent
for two years. That's pretty high. You know, our kind

(01:42):
of floating rate at the moment is four point ninety
five percent, and so we are charging a lot less
at simplicity for our floating mortgages, but our banks are
still charging pretty big margins. That's the first big issue.
And the second is our banks is simply not lending
much money to businesses and farms that create long term
prosperity in using and that's part to our regulations which

(02:03):
helped bat lend more money to mortgages rather than to
businesses and farms.

Speaker 1 (02:08):
So Mabel, I thank you for your time today.

Speaker 2 (02:11):
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